Cryptocurrencies are financial means used outside the field of regular monetary systems. Bitcoin developed to expand the use of digital transactions, enabling a P2P transaction model. Central banks and governments have recognized the growing demand for digital currencies; some countries such as Sweden or China are progressing to become cashless. Financial incorporation is asymmetrical across the globe, as emerging economies face issues in providing financial opportunities for their population. As a result, a recent Bank of America (NYSE:BAC) report acknowledged the benefits of digital currencies as an economic stimulator.
The Advantages of Digital Money for a Cashless Society
According to a Bank of America study, regulated or independent digital currencies could boost economic growth in developing countries. The head of emerging market cross-asset strategy and economics highlighted that digital currencies have a “lot of potential” for including the unbanked population in a global financial system.
Furthermore, David Hauner emphasized that over 50% of adults in emerging countries are unbanked – without access to a bank account. Thus digital currencies can substantially decrease transaction costs to enable more economic activities to take place. Additionally, Hauner discovered that emerging economies are increasingly active in trading cryptocurrencies despite not having a bank account.
Global consensus concludes cryptocurrencies are a hedge against inflation. A report explains the case of Venezuela, where inflation rose by 6,500% in 2020. Digital payments such as crypto provide security against inflation. Still, spending crypto is problematic as global acceptance and usage are still short-sided. El Salvador’s law of making Bitcoin a legal tender represents the first trial run for crypto to be used as a global currency.
On the Flipside
Banks Are Not Giving up on Fees
Ripple, which is currently under investigation by the SEC, created a widely used distributed ledger for cross-border payments. Their MoneyGram integration served as a first step towards accomplishing a lower fee threshold for cross-border payments.
The Bank of America report also highlighted digital currencies can reduce cross-border payment costs. The evolution towards a cashless global society adds extra incentives such as reducing corruption, formalizing the economy, and raising tax revenue.
Banks are disregarding the needs of customers from emerging countries. A world-bank report states that international transaction fees amount to 6.5%, which is “scandalously high” and above the targeted threshold of 3%.
Volatility is the Risk
The implementation of digital currencies is not without risks. Hauner highlights banks will be issuing “CBDC in the next three years.” However, he cautions digital currencies could “undermine a country’s physical currency” as high volatility could hinder macroeconomic policies.
Furthermore, providing low-risk and low-cost alternatives is the solution to increase financial inclusion. As iterated by El Salvador’s president, Bitcoin can allow people to transfer funds with ease; however, its volatility hinders its success. The progression towards generating censorship-free transactions is attainable; however, other cryptocurrencies or digital currencies will serve the purpose better.
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Source: Cryptocurrency - investing.com
